Tuesday, January 14, 2014

The Morning Call---Tapering is apparently still bad news

The Morning Call

1/14/14

The Market
           
    Technical

            The indices (DJIA 16257, S&P 1819) took a drubbing yesterday, though they remained within major uptrends across all timeframes: short term (15748-20748, 1783-1936), intermediate term (15748-20748, 1682-2263) and long term (5050-17400, 728-1900).

            Volume rose; breadth got crushed.  The VIX bounced big time off the lower boundary of its short term trading range---removing, at least for the moment, a challenge which would likely be a plus for stocks.

            The long Treasury continued to climb on improving breadth.  If it remains near current levels at the close today, the developing head and shoulders formation will be negated---a positive for bond prices.

            GLD also traded up also on better breadth, leaving it well above the upper boundary of the very short term downtrend.  This is a good sign, but not good enough to warrant action.

Bottom line:  despite lousy pin action, all trends of both indices are up.  Nevertheless, the see saw movement of late last week was replaced with a very definitive move down, brought by some negative comments from Goldman and the Atlanta Fed chief (see below).  The bond and gold markets continued to advance in spite of stocks performance.

In last weekend’s Closing Bell, I noted that the markets’ performance suggested a bit of schizophrenia.  Yesterday’s action reinforces that notion.  I don’t think that necessarily means a major correction.  It could be nothing more than stocks working off a very overbought condition.  Certainly, until there is some challenge mounted to the major uptrends, one has to assume that stocks are going higher.  As you know, my current target is the upper boundaries of the Averages long term uptrends (17400/1900).

However, if one of our stocks trades into its Sell Half Range, our Portfolios will act accordingly.

            Arguments against the secular bull thesis (medium):

            First down Friday, down Monday of 2014 (short):

    Fundamental

     Headlines

            One upbeat economic data point yesterday was the Treasury’s report that in December it ran a surplus.  Yes, it is a positive; but to mean anything, the deficit has to shrink and then stay low.  We don’t need to run surpluses, we just need GDP to catch up with our far too high national debt.  That said, with the current group of clowns now overseeing fiscal policy, I wouldn’t bet any money on it.

            What got the Market off on the wrong foot was a report from Goldman stating that stocks were generously valued (I linked to the report in yesterday’s Morning Call; so if you missed it, you can go back and read it).  That was followed by a statement from the Atlanta Fed chief that he had growing confidence in the economy and continued to support tapering---and it was all downhill from there.

            Both repeat my concern about the Market (1) the Goldman report because I firmly believe that stocks are overvalued and (2) the increased likelihood of tapering because I think that tapering will probably have more impact on the security prices than it does on the economy,

            All that said, as I noted in the Technical section, I am assuming nothing about any kind of correction except that it will come sooner or later and the later it is, the worse it will be.
    
Bottom line:  at least I am getting some company on valuation from one of the big dogs.   That, of course, doesn’t mean that stocks are on their way to Fair Value.  It does mean that a gradually improving economy notwithstanding, the Market is (as calculated by our Model) extremely overvalued which won’t be cured by anything other than time or a correction.  Either way, I can’t emphasize strongly enough that I believe that the key investment strategy today is to take advantage of the current high prices to sell any stock that has been a disappointment or no longer fits your investment criteria and to trim the holding of any stock that has doubled or more in price.

            When is a bubble a bubble? (medium):

            Three charts (short):

            The latest from John Hussman (medium):

     Investing for Survival

            Lessons from the old timers (medium):




Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Investing For Survival is to help other investors build wealth and benefit from the investing lessons he learned the hard way.

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